In an atmosphere of increasing scrutiny of securities trading

Question

In an atmosphere of increasing scrutiny of securities trading, a fundamental issue is often overlooked. Before the Securities and Exchange Commission can take any action to prosecute wrongdoing under the Securities Acts of 1933 or 1934, a definitional threshold must be addressed. The Acts each offer a slightly different definition of security, but these definitions were left intentionally broad by Congress to keep the Acts from becoming outdated as investment instruments evolved.

Intuitively, stock would clearly seem to be a security. It is probably the clearest example of a security and is listed in both Acts' definitions. The Supreme Court, however, has refused to allow the apparent form of an investment to be conclusive proof of its substance. Instead, the Court has adopted its own method for examining the "economic reality" of a particular stock and defines it as a security only if it really has the traditional characteristics of stock.

The most common feature of stock is the right to receive dividends contingent upon an apportionment of profits. The other traditional characteristics are: negotiability; ability to be pledged or hypothecated; voting rights conferred in proportion to the number of shares owned; and ability to appreciate in value.

The Court has recognized that of all instruments, stock represents to many people, both trained and untrained in business matters, the paradigm of a security. Because of the high expectation that trading in stock is covered by the Acts and the fact that stock lends itself to consistent definition, the Court awarded stock a unique status. If an instrument is called stock and has the above listed characteristics, then it will be considered a security without any further investigation into the surrounding circumstances. The Court emphasizes that this special treatment may not be appropriate even for other instruments enumerated in the Acts' definitions and expressly left for another day the question whether notes or bonds or some other category of instrument might be shown by “proving only the document itself.” As a result, more sophisticated modern instruments may unexpectedly fall beyond the purview of the SEC and the Acts completely.   1 
 1. According to the passage, all of the following are true EXCEPT which of the following?

A. The Supreme Court can overrule jurisdictional determinations made by the SEC with respect to definitional interpretation of the Securities Acts.
B. Investigation of the economic reality of a security involves consideration not only of the label and form of the security in question, but also requires examination of the particular characteristics of the actual instrument.
C. The failure of Congress to adequately define a basic term in the Securities Act has led to a widespread uncertainty that has dangerous repercussions for securities fraud investigations.
D. The increased scrutiny of modern securities trading may lead to a disregard of potentially important definitional concepts.
E. An instrument listed as an example of a security in the section of the Acts defining a security may nevertheless be deemed not to be a security.

2 
 2. The passage most closely supports which of the following statements?

A. The Securities Acts are flexible documents with sufficient leeway to adapt to modern situations without the need for revision.
B. An instrument characterized by negotiability, the ability to be pledged or hypothecated, voting rights conferred in proportion to the number of shares owned, and ability to appreciate in value will be deemed a security.
C. The Supreme Court has been fair and thoughtful in its interpretation of the Acts' definitions of security.
D. The most important feature of stock is the right to receive dividends contingent upon an apportionment of profits.
E. Modern instruments are more sophisticated than those in contemplation during the drafting of the Acts.

3 
 3. What is the main point of the passage?

A. Stock is the most paradigmatically security-like of all instruments.
B. Tighter scrutiny on the SEC is necessary in the current era of increasing scrutiny on securities trading lest the Commission overstep its jurisdiction and prosecute cases which fall outside the statutory definitions of a security.
C. The Supreme Court has appropriately ruled to give stock a special status among instruments.
D. The definition of a security can be an important issue even for instruments which seem clearly to fall within the Acts' definitional parameters.
E. The Supreme Court has had an important role in developing and defining SEC enforcement activities.

4 
 4. Which of the following can be correctly inferred from the passage with respect to the relationships between various parties to securities trading or the regulation thereof?

A. Because of definitional uncertainties, unsophisticated traders or investors should seek professional advice before making assumptions about the SEC's jurisdiction over any particular trade or instrument.
B. Multiple branches of federal government can affect a trader's or investor's rights.
C. The Supreme Court has not ruled on whether notes or bonds can be defined as securities by proving only the document itself.
D. Because of the Supreme Court's ruling regarding the economic reality of securities under consideration, stock can generally be considered to be a security.
E. Judicial over-interpretation has complicated what would otherwise be a straight forward determination by the SEC of its substantive jurisdiction.

bayers · Answer

Hey everyone - I have included official answers and explanations for questions 2 and 4 of the passage below. For question 2, A is the correct answer, not D. IMHO, answer A's inclusion of "sufficient" makes it hard to choose as one of the claims of the passage is that the definitions may not include some more complex modern securities (last paragraph). For question 4, I think the best approach to get the answer is POE, but certainly agree that the answer is far too broad. Just my two cents, hope this helps.

Question 2:

The phrase passage most closely supports indicates that this is a retrieval question. The subject of the question is the ideas in the passage. In order to answer the question, determine what the passage states about the subject and evaluate the answer choices, eliminating any choice which cannot be supported by the text.

Choice A: Correct.  The Acts can adapt to modern situations because these definitions were left intentionally broad by Congress to keep the Acts from becoming outdated as investment instruments evolved.

Choice B: No. The recycled language negotiability, the ability to be pledged or hypothecated, voting rights conferred in proportion to the number of shares owned, and ability to appreciate in value may make the choice tempting, but it’s a memory trap. The passage states that If an instrument is called stock and has the above listed characteristics, then it will be considered a security without any further investigation into the surrounding circumstances. So the instrument must have those characteristics AND be called stock. The choice doesn’t claim that the instrument is called stock.

Choice C: No. The phrase fair and thoughtful is an emotional appeal. The author makes no such judgement.

Choice D: No. The recycled language feature of stock is the right to receive dividends contingent upon an apportionment of profits may make the choice appealing. However, the passage states that it’s the most common feature, not the most important feature.

Choice E: No. This answer choice uses the phrase more sophisticated to compare modern instruments to those in contemplation during the drafting of the Acts. However, this is a no such comparison answer, as the passage does not compare these two items.

Question 4:

The phrase can be correctly inferred in the question stem indicates this is an inference question. The task of the question is indicated by the word inferred. The subject of the question is the various parties to securities trading or the regulation of securities trading. In order to answer the question, determine what the passage states about the subjects and evaluate the answer choices, eliminating any choice which cannot be supported by the text. According to the passage, The Acts each offer a slightly different definition of security, but these definitions were left intentionally broad by Congress to keep the Acts from becoming outdated as investment instruments evolved. In addition, the Court has adopted its own method for examining the "economic reality" of a particular stock and defines it as a security only if it really has the traditional characteristics of stock. Evaluate the answer choices, eliminating any choice any choice which cannot be supported by the text.

Choice A: No. The inclusion of the phrase investors should seek professional advice is an emotional appeal. The passage only says that these definitions were left intentionally broad by Congress and that the Court expressly left for another day the question whether notes or bonds or some other category of instrument might be shown by “proving only the document itself.” It may seem like a good idea to get advice about investment instruments, yet the passage does not claim that unsophisticated traders or investors should seek professional advice.

Choice B: Correct.  According to the passage, The Acts each offer a slightly different definition of security, but these definitions were left intentionally broad by Congress to keep the Acts from becoming outdated as investment instruments evolved. In addition, the Court has adopted its own method for examining the "economic reality" of a particular stock and defines it as a security only if it really has the traditional characteristics of stock. Both the Congress (the Legislative Branch) and the Supreme Court (the Judicial Branch) are involved.

Choice C: No. The claim that the Supreme Court has not ruled is a memory trap. While the passage states that the Court expressly left for another day the question whether notes or bonds or some other category of instrument might be shown by “proving only the document itself,” it is possible that the Court has since made a ruling.

Choice D: No. The claim that stock can generally be considered to be a security is a memory trap. The passage does state that If an instrument is called stock and has the above listed characteristics, then it will be considered a security without any further investigation into the surrounding circumstances. However, note that the designation of stock is not sufficient. It must also have the above listed characteristics, which were negotiability, ability to be pledged or hypothecated, voting rights conferred in proportion to the number of shares owned, and ability to appreciate in value.

Choice E: No. The phrase over-interpretation is extreme language. The passage mentions that these definitions were left intentionally broad by Congress. To claim that the interpretation would otherwise be a straight forward is a reversal.

sarkarsarbani · Answer

Can someone explain question 1

guddo · Answer

According to the passage, all of the following are true EXCEPT which of the following?

The passage explains that the definition of “security” under the Acts is broad, and that the Supreme Court does not always treat the label of an instrument as decisive.  The main point  is that the Court looks to the actual nature of the instrument, especially with stock, and that this can leave some modern instruments outside the Acts.  So the wrong choice will misstate the passage’s explanation of why this uncertainty exists .

A. The Supreme Court can overrule jurisdictional determinations made by the SEC with respect to definitional interpretation of the Securities Acts.

This is supported well enough by the passage. It says that before the SEC can prosecute wrongdoing, the definitional issue must be addressed, and it presents the Supreme Court as setting the controlling interpretation of what counts as a security.

B. Investigation of the economic reality of a security involves consideration not only of the label and form of the security in question, but also requires examination of the particular characteristics of the actual instrument.

This is true. The passage explicitly says the Court refuses to let the apparent form be conclusive and instead looks at whether the instrument really has the traditional characteristics of stock.

C. The failure of Congress to adequately define a basic term in the Securities Act has led to a widespread uncertainty that has dangerous repercussions for securities fraud investigations.

This is the exception. The passage does not say Congress failed to define the term adequately. It says Congress left the definitions intentionally broad so the Acts would not become outdated. Also, the choice adds exaggerated language such as “widespread uncertainty” and “dangerous repercussions,” which goes beyond the passage.

D. The increased scrutiny of modern securities trading may lead to a disregard of potentially important definitional concepts.

This is true. The passage begins by saying that in the atmosphere of increasing scrutiny, a fundamental issue is often overlooked.

E. An instrument listed as an example of a security in the section of the Acts defining a security may nevertheless be deemed not to be a security.

This is true. The passage says stock is listed in both Acts, yet the Court will treat it as a security only if it truly has the traditional characteristics of stock.

Answer: (C)

In an atmosphere of increasing scrutiny of securities trading

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In an atmosphere of increasing scrutiny of securities trading

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